Weekend Reading: Inconceivable

In an interesting twist, this past week the markets rallied in anticipation Britain would “Remain” in the European Union reversing the sell-off last week which was hedging the potential split risk. The problem of front-running the vote, of course, was the possibility of being wrong.

Despite a variety of polls and betting sites showing rising odds of Britain remaining in the EU, the “inconceivable” occurred last night proving everyone wrong. This is why I said on Tuesday:

“There are times in portfolio management where “doing nothing” is better than “doing something.” This is one of those times.

With portfolios already running at just 50% of total recommended equity exposure, portfolio risk is already substantially mitigated. This leaves us is the best place to be for the moment as we await the outcome of the “Brexit” vote on Thursday and the culmination of Yellen’s testimony on the “Hill.”

From that vantage point, we can then assess the markets and make a reasonable assumption about what to do next. Could we miss a bit of upside? Absolutely. But such a small lag is a much better outcome than trying to recoup a substantial loss if things go wrong.”

In this weekend’s newsletter, (subscribe for free e-delivery) I will do a complete technical review of the markets and portfolio allocations following the “knee-jerk” reaction to the vote.

The long-term outcome for Britain is much more favorable than that of the EU. The biggest problem for the EU will be trying to keep the rest of its members from jumping ship as well. The vote in Britain last night will likely mark the beginning of the end for the EU as it currently exists.

Importantly,with the vote now behind us, the focus of the markets will once again turn back global economic realities which remain wanting at best. As Andrew Lapthorne noted from SocGen (via ZeroHedge) previously:

“Whatever the outcome of the Brexit vote this week investors will still be facing the prospect of negative rates and negative yields on a huge range of bonds, massive corporate leverage with worryingly rising delinquencies and of course expensive equity markets and falling profits. To that extent, these political events are a distraction from the main event, weak global economic growth and perverse asset markets. So whilst the market preference for the status quo might be celebrated in the short-term, actually when the fog clears all of the problems will still be there.“

Here is your reading list for the weekend.

“With markets having wrongly bet on a Remain win in the past few days, and with patchy liquidity sure to amplify price movements, there will be severe pain for levered long investors and, potentially, opportunities for cash-rich ones”– Mohamed El-Erian, PIMCO